Recessions and stock market crashes are inevitable in a market-based economy, but few Americans realize that their investments face far greater risks than falling stock prices.
Due to largely unknown legal changes, millions of Americans could temporarily or even permanently lose their retirement and other investment savings in the next major financial crash, while Wall Street companies and banks that are too big to fail are protected.
That may sound like a wild conspiracy theory, but the danger is real and well documented.
How Wall Street Centralized Ownership of Your Investments
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Beginning in the 1970s, state lawmakers, at the request of the powerful Wall Street and banking institutions, quietly passed a series of changes to the Uniform Commercial Code, a law in effect in all fifty states. These changes allowed financial institutions to effectively transfer direct ownership of most securities to individual investors, including investors with retirement accounts and traditional investment accounts.
Thanks to changes in the law, your pension is not as safe as you think. (Michael Nagle/Bloomberg via Getty Images)
Under the revised legal framework, direct ownership of securities such as stocks and bonds was centralized within a single financial institution controlled by Wall Street’s largest corporations and banks: the Depository Trust Company, or DTC.
Today, DTC “provides the custody and maintenance of assets for 1.44 million security matters from more than 170 countries and territories, valued at more than $100 trillion by 2025.” To put that figure in perspective, the entire federal budget is about $7 trillion.
In January I released a new book, “The Next Big Crash: Conspiracy, Collapse, and the Men Behind History’s Biggest Heist,” to explain how this legal framework was constructed, why it poses serious risks to consumers today, and to expose the remarkable conspiracy behind the creation of DTC. The book is the result of years of research and the evidence it presents is nothing short of astonishing.
Why this system exists and what it replaces
The Depository Trust Company is central to the modern securities ownership model. Major banks and broker-dealers, with the help of a mysterious figure with a long history of working for and alongside the CIA, created DTC in the early 1970s with the aim of alleviating Wall Street’s growing paperwork crisis.
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Back then, buying and selling securities was a slow process with a lot of paperwork. By centralizing registered ownership of securities in a single institution, transfers could be accomplished simply by changing records, which is now done electronically. What once took several days could be completed almost immediately.
Lawmakers were told that this shift was a technical modernization intended to improve efficiency and reduce risk. In many ways it did just that. The cost and time required to do business on Wall Street dropped dramatically after the creation of DTC. But these gains came at a high price. Centuries of property rights were effectively cast aside. Traditional securities ownership, based on clear property rights and constitutional protections, was replaced.
Who benefits and who bears the risk?
Under the current DTC model, most investors no longer own their securities directly. Instead, they cling to what the law calls a ‘right to security’. This arrangement is contractual in nature. It grants certain rights and protections, but does not grant direct registered ownership. When you buy shares in a company, you don’t actually acquire the shares themselves. You get a range of investment rights linked to those shares.
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This system raises serious ethical issues. It provides enormous benefits to the most powerful financial institutions, while weakening the property rights of ordinary investors.
Centralized ownership allows securities transactions to be processed with extraordinary speed, fueling the ever-increasing activity on Wall Street. This activity generates huge fee income for large institutions.
In recent years, institutions have also reaped huge profits from riskier practices such as stock lending and derivatives trading. These activities could not have occurred at their current scale under the stronger ownership framework that existed prior to the creation of DTC. Centralized ownership made this possible.
Worse, Wall Street and lawmakers didn’t stop there. In the 1990s, they used centralized ownership to make further changes to laws and regulations designed to protect large financial institutions during systemic crises.
Under Article 8 of the Uniform Commercial Code, if a brokerage firm collapses during a financial crisis, foreclosed creditors, including banks, can seize securities used as collateral in credit agreements with broker-dealers. This may include customer securities such as stocks and bonds if these are pledged as collateral for those loans.
Investors could find their pensions at risk in the next crash. (iStock)
As a result, investors could lose their entire portfolios during the next big crash if their broker-dealer pledges customer assets to obtain financing.
Current regulations generally prohibit investment firms from using most client securities as collateral, with the exception of margin accounts. However, Article 8 allows secured creditors to seize customer assets pledged as collateral if a company cannot pay its debts, even if the securities have been wrongfully pledged.
Furthermore, as I document in the book, during a crisis, existing emergency laws can be invoked to change or suspend rules designed to protect customers. Lawmakers could also enact new legislation that weakens current consumer protections.
A problem that can still be solved
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The good news is that this problem is not irreversible.
Because the Uniform Commercial Code is state law, the state legislature has the authority to restore investor priority. A small number of lawmakers across the country are beginning to recognize the danger and push back, but sustained public pressure will be needed to bring about meaningful reforms.
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The next financial crash could come sooner or later, and its precise trigger is impossible to predict. What is predictable is the legal structure waiting on the other side. Unless Americans demand change now, many may discover too late that many of the rules governing their retirement savings were not designed to protect them.
Justin Haskins is a New York Times bestselling author, vice president at The Heartland Institute and senior fellow for Our Republic.
